Pop quiz: Which European country has the most liberal drug laws? (Hint: It's not the Netherlands.)

Although its capital is notorious among stoners and college kids for marijuana hazefilled "coffee shops," Holland has never actually legalized cannabis  the Dutch simply don't enforce their laws against the shops. The correct answer is Portugal, which in 2001 became the first European country to officially abolish all criminal penalties for personal possession of drugs, including marijuana, cocaine, heroin and methamphetamine.

At the recommendation of a national commission charged with addressing Portugal's drug problem, jail time was replaced with the offer of therapy. The argument was that the fear of prison drives addicts underground and that incarceration is more expensive than treatment  so why not give drug addicts health services instead? Under Portugal's new regime, people found guilty of possessing small amounts of drugs are sent to a panel consisting of a psychologist, social worker and legal adviser for appropriate treatment (which may be refused without criminal punishment), instead of jail. (See the world's most influential people in the 2009 TIME 100.)

The question is, does the new policy work? At the time, critics in the poor, socially conservative and largely Catholic nation said decriminalizing drug possession would open the country to "drug tourists" and exacerbate Portugal's drug problem; the country had some of the highest levels of hard-drug use in Europe. But the recently released results of a report commissioned by the Cato Institute, a libertarian think tank, suggest otherwise.

The paper, published by Cato in April, found that in the five years after personal possession was decriminalized, illegal drug use among teens in Portugal declined and rates of new HIV infections caused by sharing of dirty needles dropped, while the number of people seeking treatment for drug addiction more than doubled.

"Judging by every metric, decriminalization in Portugal has been a resounding success," says Glenn Greenwald, an attorney, author and fluent Portuguese speaker, who conducted the research. "It has enabled the Portuguese government to manage and control the drug problem far better than virtually every other Western country does."

Compared to the European Union and the U.S., Portugal's drug use numbers are impressive. Following decriminalization, Portugal had the lowest rate of lifetime marijuana use in people over 15 in the E.U.: 10%. The most comparable figure in America is in people over 12: 39.8%. Proportionally, more Americans have used cocaine than Portuguese have used marijuana.

The Cato paper reports that between 2001 and 2006 in Portugal, rates of lifetime use of any illegal drug among seventh through ninth graders fell from 14.1% to 10.6%; drug use in older teens also declined. Lifetime heroin use among 16-to-18-year-olds fell from 2.5% to 1.8% (although there was a slight increase in marijuana use in that age group). New HIV infections in drug users fell by 17% between 1999 and 2003, and deaths related to heroin and similar drugs were cut by more than half. In addition, the number of people on methadone and buprenorphine treatment for drug addiction rose to 14,877 from 6,040, after decriminalization, and money saved on enforcement allowed for increased funding of drug-free treatment as well.

Portugal's case study is of some interest to lawmakers in the U.S., confronted now with the violent overflow of escalating drug gang wars in Mexico. The U.S. has long championed a hard-line drug policy, supporting only international agreements that enforce drug prohibition and imposing on its citizens some of the world's harshest penalties for drug possession and sales. Yet America has the highest rates of cocaine and marijuana use in the world, and while most of the E.U. (including Holland) has more liberal drug laws than the U.S., it also has less drug use.

"I think we can learn that we should stop being reflexively opposed when someone else does [decriminalize] and should take seriously the possibility that anti-user enforcement isn't having much influence on our drug consumption," says Mark Kleiman, author of the forthcoming When Brute Force Fails: How to Have Less Crime and Less Punishment and director of the drug policy analysis program at UCLA. Kleiman does not consider Portugal a realistic model for the U.S., however, because of differences in size and culture between the two countries.

But there is a movement afoot in the U.S., in the legislatures of New York State, California and Massachusetts, to reconsider our overly punitive drug laws. Recently, Senators Jim Webb and Arlen Specter proposed that Congress create a national commission, not unlike Portugal's, to deal with prison reform and overhaul drug-sentencing policy. As Webb noted, the U.S. is home to 5% of the global population but 25% of its prisoners.

At the Cato Institute in early April, Greenwald contended that a major problem with most American drug policy debate is that it's based on "speculation and fear mongering," rather than empirical evidence on the effects of more lenient drug policies. In Portugal, the effect was to neutralize what had become the country's number one public health problem, he says.

"The impact in the life of families and our society is much lower than it was before decriminalization," says Joao Castel-Branco Goulao, Portugual's "drug czar" and president of the Institute on Drugs and Drug Addiction, adding that police are now able to re-focus on tracking much higher level dealers and larger quantities of drugs.

Peter Reuter, a professor of criminology and public policy at the University of Maryland, like Kleiman, is skeptical. He conceded in a presentation at the Cato Institute that "it's fair to say that decriminalization in Portugal has met its central goal. Drug use did not rise." However, he notes that Portugal is a small country and that the cyclical nature of drug epidemics  which tends to occur no matter what policies are in place  may account for the declines in heroin use and deaths.

The Cato report's author, Greenwald, hews to the first point: that the data shows that decriminalization does not result in increased drug use. Since that is what concerns the public and policymakers most about decriminalization, he says, "that is the central concession that will transform the debate."